Beware of these multibaggers

(Jun 30, 2010)

In this issue:
» Abandon the US dollar as reserve currency - UN
» India to get its own house start index
» India Inc. gets generous with dividends
» Gold imports down 75%
» ...and more!!

---------------- Your views are invaluable. Make them count! ----------------
Participate in the Equitymaster Investor Survey 2010 and make your invaluable views count! And as a Thank you from our side we will gift you our exclusive guide - 'How To Plan Your Equity Portfolio'. Go ahead and Take the Survey Now!
--------------------------------------------------------------------------------------

00:00

Chart of the day

Investors are often lured by the prospect of lesser priced stocks multiplying several times. More so when they read business newspapers proclaim FIIs showing keen interest on such stocks. We came across one such headline today. When we cull out data of the performance of such small priced stocks listed on the BSE, we come across some interesting statistics. Take the case of the left most bar in the chart. It shows that the average returns for stocks priced less than Re 1 turned out to be a whopping 593% on a point to point basis. But guess what, only one out of five stocks in the category under consideration has given more than 500% returns during the period. In fact, for every stock in this universe that has been a multibagger, there have been 2 others that either lost money or made very little. In other words, averages can sometimes hide a lot more than they reveal.

Such statistics only prove how important it is for investors to be selective when it comes to picking potential multibaggers. Especially when they are looking in the mid and smallcap space. Even slight carelessness can bring them dangerously close to losing a lot of money than making the same. It goes without saying that the exposure to such stocks has to be limited and as per one's risk taking capacity. Also, investors need to do away with the misconception that only mid and smallcaps can turn out to be multibaggers. If chosen carefully, even safe bluechips can bring in pleasant surprises.

Data source: CMIE Prowess, Equitymaster

01:05

What are the ideal characteristics of a sound currency? All said and done, it should be such that even if you bury it under ground and remove it after five years, it should be able to buy you the same amount of goods and services as before. We believe Gold has performed this job fantastically well over the years. But what about the US dollar, the currency the world calls the main global reserve currency? It goes without saying that a dollar bill will buy you far fewer goods and services today than it did five years ago. And you can rest assured that it will buy you far fewer goods and services five years from now than today.

In other words, the US dollar has not been able to preserve its value. It has destroyed purchasing power. Infact, the value destruction has only gained more intensity in recent times. And is likely to increase even more going forward. Little wonder, a new United Nations report has called for abandoning the US dollar as the main global reserve currency. It has argued that the dollar has not been able to safeguard value. A point of view no different from ours. The report has gone on to state that the dollar should be replaced with the IMF's special drawing rights (SDRs). These are units of payment made up of basket of currencies. The idea is indeed welcome. But its implementation will likely prove quite an onerous task.

01:39

With a view to tide over India's grave power shortage, the government launched the concept of ultra mega power projects (UMPP) couple of years back. UMPPs are big power projects with average power generation capacity of 4,000 MW. Four such projects are already under execution currently. Now, the government is looking to allocate five more UMPPs. These are expected to come in Andhra Pradesh, Tamil Nadu, Maharashtra, Gujarat, and Jharkhand.

These UMPPs are seen as one of the key solutions to our power problems. But what remains to be seen is their execution in time. After all, if these power projects do not come as per schedule, the power woes will only worsen for the country as a whole!

02:05

That a lot of grey areas exist in the Indian real estate sector is well known. And to bring some sort of transparency to this sector, RBI will soon be launching a house start index. This will help gauge activity in the <>construction sector. Housing activity is considered as amongst the important lead indicators of economic activity. This is because of its substantial forward and backward linkages with other sectors of the economy. The housing start index already exists in the US. It is an important economic indicator there.

Infact, the seeds of the global financial crisis were first sowed in the real estate and mortgage space in the US. And so the case for having such an index has already been strengthened. Infact, the RBI deputy governor Subir Gokarn opines that the core of any business cycle theory is what happens to the construction sector. This move may not solve all the issues plaguing the realty sector in India right now. But we certainly believe it to be a step in the right direction.

03:02

Corporate India was generous in rewarding shareholders in FY10. They decided to dole out the most cash ever through dividends. 980 listed entities proposed to pay dividends of Rs 704 bn. A 26% increase versus last year. However, the payout rise was higher than the increase in net profits. Profits grew only by 22%.

But, guess who the main beneficiaries of this generosity were. Holding majority stakes in most of their companies, promoters were able to profit the most. Public sector promoter (the government) received 31.4% of the total booty, private sector ones got 23.8%. Public shareholders got only 8.5% of the total payout. These large payouts were at the sake of capacity expansion and other investments in growing the businesses.

It seems like the promoters were generous to themselves. And that too with tax free returns! This is where the 25% public shareholding rule will serve us in good stead.

03:41

We all know that gold prices have been going through the roof. Seems like the golden metal is in hot demand. However, there are some surprising trends that are emerging in India that are yet not that talked about. Sample this. A recent Wall Street Journal report estimates that gold imports in June 2010 fell 75% compared to last year. Further, the President of the Bombay Bullion Association opined recently that poor gold jewelry demand has caused half the jewelry manufacturers to shut shop in Mumbai, while the remaining have slashed their work shifts.

One major reason for these developments is none other than the high gold prices themselves. High prices are tempting Indian consumers to sell their old gold jewelry and that supply is reducing the need for imports. In fact, in Mumbai itself, daily scrap sales have risen ten-fold to about 100 kgs, from around 10 kg sold normally. Evidently, one of the main users of gold are finding gold prices to be too high. Only safe currency status is what appears to be keeping gold prices where they are at the moment.

04:14

The fuel price hike finds support at the highest level. A recent statement of Prime Minister Manmohan Singh makes that amply clear. He says that the fuel price hikes were much needed reforms. In fact, diesel prices will also be freed. As mentioned in the previous editions of the 5 Minute Wrap Up, we fully concur with the government's view that fuel subsidies are unsustainable. But the problem is not in the economics. What will happen when the opposition raises a hue and cry over the issue? Further, what happens when crude oil prices shoot up from the current benign levels? In our view, that is when the government will be tested. In fact, on the question of opposition, Dr. Singh said that he had read about the intentions of the opposition parties and had not talked to anyone in the political establishment. In our view, that will be the first test of the decision on fuel price deregulation.

04:42

After a lackluster start, the Indian indices have managed to lock in considerable gains in today's session backed by strength in capital goods and energy stocks. Infact the Indian markets along with Indonesia are the only gainers in Asia today. The BSE-Sensex was trading nearly 88 points (0.5%) higher at the time of writing. Fears of yet another economic recession took a toll on the US markets yesterday. The European markets have opened on a cautious note.

04:55

Today's investing mantra

"The individual investor should act consistently as an investor and not as a speculator. This means... that he should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that satisfies him that he is getting more than his money's worth for his purchase." - Benjamin Graham

The 5 Minute WrapUp Premium is now Live!

A brand new initiative of Equitymaster, this is the Premium version of our daily e-newsletter The 5 Minute WrapUp.

Join us in this journey to uncover the sensible way of managing money and identifying investment opportunities across various asset classes including Stocks, Gold, Fixed Deposits... that over time can help you realize your life's goals...

One, we all know that "Imported Fuel" (crude oil) is heavily taxed by our Government. Two, from the Tax Collected a part of it is paid as subsidy to protect the citizens! Good Enough. But, instead of taxing at the time of import, why dont they think of an equation, where the import tax is reduced to bring the price of fuel to the consumers and then tax the consumers at petrol/diesel outlets so that the essential users (the public) do not feel the pinch and all such tax earnings are slowly but within a time frame, balanced out in a kind of escrow account of subsidies being applied. This way I feel, in the long term the governments effort to de-control the petrol subsidy becomes a tax-earning route. I may not the first one to give this opinion, but, isn't this logical direction for opening up the economy too, whereby fuel prices do not add to the inflation (inflated price of other essential food products)?

Yesterday the S&P lost 3% in a day's trading. Are these signs that we are about to see a severe correction in the stock markets.Paul Krugman has now become very pessimistic and so are the other notable economists. Mr Bill Bonner has been projecting bearish outlook for some time now. I am surprised that there is no mention about the Chinese reports appearing yesterday about some slowdown there, thier markets tanked to 12 month low. Looking forward to read more on these developments in 5 minute Wrapup. Are we headed for MELTDOWN PART 2.....is the question most of us are wondering.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.